Advice and Tips
Here’s some advice if you’re entering into a shareholders’ agreement
Being a co-owner in a business isn’t always easy, which is why it’s important to have a shareholders’ agreement in place at the outset. This agreement is a contract between shareholders that either deviates from or follows the Norwegian Companies Act.
In Norway we have more than 300,000 joint stock companies that vary greatly from one another with respect to their business and ownership models – from small businesses with one shareholder to large companies with thousands of them. This is why lawmakers have given shareholders a great deal of freedom to deviate from/ complement the Act through making their own agreements in order that legal provisions can be adapted to individual companies.
A shareholder agreement is a contract between shareholders that either deviates from or follows provisions appearing in the Act. Many of these provisions allow for discretionary assessments to be made in individual cases.
Having a shareholders’ agreement that has been thoughtfully prepared ensures that each shareholder will have a greater degree of predictability than what the Act provides. As more than half of all joint stock companies have two or more shareholders, there’s a great need for having these kinds of agreements.
There are several good reasons to enter into a shareholders’ agreements, especially during the startup phase of a jointly owned company.
Unlike statutes that deal with the relationship between the company and shareholders –and are required by law – a shareholders’ agreement is voluntary and deals with the relationship between shareholders or a third party. One practical aspect of shareholders’ agreements is that they offer more freedom regarding the agreement than what’s regulated in the statues; and in contrast with these statutes, agreements may be kept confidential.
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Key shareholder agreement terms
Here’s some terms you should become familiar with if you’re thinking about entering into a shareholders’ agreement:
- Definitions: The first part of a shareholders’ agreement usually defines who’s included in the agreement, what it means to be a shareholder and, if applicable, information about the relationship between shareowners.
Many companies acknowledge that shares can be owned both personally and by another company. However, it’s usual that it’s the individual physical shareowner who is the liable party, in other words either the individual who controls the company that owns the share or the actual person who owns the share. A shareholder register must be kept that shows a list of active shareowners in the company (see the Private Limited Liability Companies Act, section 4-2).
- Company background and purpose: This section often contains a list of shareowners, the total number of shares and how many each shareowner owns. In addition, there’ll often be a general description of the company’s purpose.
A company’s purpose may also appear in its incorporation documents, which contain its bylaws, board of directors and auditor(s). The general purpose of incorporation is to create financial gains for company owners; otherwise, the application of profits and conditions in the event of the company’s dissolution be described (see the PLLCA, sections 2-1—2-3).
- Company bylaws: These provisions regulate a company’s legal status, are considered to be public information and can only be changed at a shareholders’ meeting (see the PLLCA, section 5-18). A shareholders’ agreement is a private legal relationship between the parties in the shareholders’ agreement.
- Company ownership: A shareholders’ agreement may contain provisions about active or passive ownership, meaning there are regulations about the extent to which you as a shareowner are required to be employed in the company or not.
Active ownership means that there’s a connection between being a shareholder and being an employee. If this is the case, regulations on withdrawal or ejection of a shareholder who either quits voluntarily or is terminated, usually appears in the shareholders’ agreement.
Passive ownership often raises questions about the extent to which 1) a shareholder’s bound by a duty of loyalty, and 2) competitive restrictions apply to an employee who leaves and starts up a new employment relationship.
- Company financing: This section usually has regulations about all possible solutions if the company’s facing challenging financial circumstances.
It’s especially important in companies where “the product” is under development. These companies’ revenues are usually insignificant before their “product” is finished (it’s often unprofitable to sell an unfinished product/project).
A company must have sound equity and liquidity (see PLLCA, section 3-4). The board of directors has a duty to act if the company’s financial situation is unsound (see PLLCA, section 3-5), and can call a general meeting in order to secure new financing – for example, increasing share capital or declaring the company dissolved. Breaches of this point can lead to liability charges being raised against the board.
During an increase in share capital, all shareholders must receive an offer to participate in relation to their own shares. If you don’t participate in the share capital increase, your shares will be “watered down”, and the value of the ownership interest will be reduced accordingly.
- Transfer of shares: This can’t normally be done freely as a company often has an interest in controlling and approving who can become shareholders. The terms for share transfers appear in this section of the agreement and possibly in the bylaws as well. Transfers usually depend on getting board approval (the board can only refuse a transfer if they have a justifiable reason for doing so).
Buying and selling shares often (but not always) requires that the new owner also enters into the shareholders’ agreement and becomes bound by the regulations that apply to among other things transfers. This can take place through a declaration of accession or signing the shareholders’ agreement.
A corporation can be authorized by the general assembly to acquire its own shares. This type of authorization can also appear in the shareholders’ agreement in the form of regulations on preferential rights (see PLLCA, section 9-2).
For more information on share transfers, including right of first refusal, selling, co-sale right and co-sale duty, see the article entitled Transferring shares
- Share issue: This happens when a company makes new shares available for sale, usually doing so to raise money. Quite often, existing shareholders have a preferential right to buy shares first when an issue takes place. Unless the general assembly decides something else, current shareholders have preferential rights to buy shares during a capital increase (see the Companies Act, section 10-4).
For companies with several shareholders, a faster alternative to secure a company necessary financing may have to be used in times of crisis, a so-called ‘private placement’. This is a share issue where only a selection of shareholders or new investors receive an offer to buy shares, thereby excluding many of the company’s regular shareholders. A private placement means that these new acquisitions take place when only certain individuals are approached and regular shareholders’ preferential rights are waived.
- Breach of contract: This section of a shareholders’ agreement describes what happens when someone has broken the terms of this agreement.
The most common consequences include coming to an agreement about liability along with a provision about transferring shares, or a provision about fines (liquidated damages) along with liability if the company’s losses exceed a fine’s amount. It’s not unusual in this situation to negotiate a daily fine.
- Non-competition clause: Several shareholders’ agreements have their own non-competition clause. Because shareholders must often sign these agreements, they are then bound by the general rules regarding competition with other companies.
On the one hand the equal treatment principle states that you as a shareholder must be treated equally with other shareholders. On the other hand, it’s difficult to see that an employee must be bound by provisions on competition that don’t align with the regulations found in the Working Environment Act (ch. 14A). According to this provision, a premise exists which states that an employer and employee must enter into a written contract restricting competition. The parties’ relationship is somewhat different in this case in that this contract is entered into between parties in the community of shareholders. If the basic idea is that there’s a binding agreement on competition, this must be interpreted on the basis of the regulations in this chapter, which states restrictions on quarantine period, reporting obligations and compensation.
In cases where an employee can’t be defined as an employee but rather as an employer because of their position or ownership share, questions about the non-competition clause’s scope and justification must be assessed based on the Contracts Act (section 38).
- Making changes: Most shareholders’ agreements clarify how any proposed changes to their content are to be made; however, if this isn’t the case, a unanimous agreement is required to make any changes to an agreement.
For example, if a 2/3 majority is required to chance a contract’s central provisions, you have to take a closer look at the company’s shares. If the majority shareholder owns more than 2/3 of the total number of shares, this individual can change the shareholders’ agreement all on their own. This would be unfortunate for you as a minority owner who’s bound by a shareholders’ agreement that can be changed at any time by the majority shareholder alone.
- Confidentiality agreement: Most shareholders’ agreements have provisions stating that their content must be kept confidential as long as any shareholding exists, and sometimes afterwards as well.
Bylaws are public information and must be reported to the Brønnøysund Register Centre upon their establishment and subsequent changes. The opposite applies to shareholders’ agreements that are private legal matters between company owners. This may be seen as a result of the duty of loyalty in a business relationship; therefore, breaching this duty may lead to liability charges.